In the business activities within an economic system nowadays, there are have many violations occur in which each transaction contains riba, which is called the interest. Islam has been revealed by God, with one of the purpose is to regulate economic affairs.

There are many assumptions which the interest is perceived allowed in some cases. But in Shariah rules, the usage of interest in the transaction is not allowed. Riba is part of the prohibited transaction in the terms of the way we do the transaction. There is no strong reason to assumed that the prohibition is only applies for the debt in consumptive purpose and not for commercial loan.

Therefore, there several aqads in the business transaction, which are allowed and do not violate the Shariah rules. We can compare the transactions between transaction which comply with Shariah rules and transaction with interest based, in the aspect of law, transaction process, and also the impact after the implementation. We can see that the implementation of Shariah in every transaction, economic stability can be achieved accordance with the Maqasid Shariah, where protect the Religion, Life, Knowledge, Inheritance, and Treasure.

Finally, we can conclude that with the elimination of riba from economic system, not only affected the positive impact in the economic side, but also social justice, and economic condition with good moral and ethical environment.

1. BACKGROUND

Business is an activity that has been being implemented since the first. Various activities have been varies the business activities. These business activities occur naturally in realizing the economic situation, continue growing and stable. Economics is a system made by residents of an area, or commonly called the state, which includes labor, capital, resources, and economic actors, who participate in the production, distribution, consumption, and exchange of goods and services in the State.

Economics is divided into two branches of economic, which there are micro-economic and macro-economic. Micro-economics is the economic activity which concentrates on the market behavior, companies, and individuals themselves. While macro-economic branches of the economy concentrated on the economic performance of the country as a whole, such as investment, consumption levels, monitoring the money supply by central banks, and also interest rates. In every activities, individual has a role through every single business transactions with one of the motive is, to meet the human needs.

With the development of Islamic economics, economic concepts that is coming from the west, are called conventional economic. Conventional economics has adopted capitalism theory. In the Islamic perspective, conventional economics has many weakness, where there are many assumptions that has been proved inconsistently, such as (1) The desire of human being in consumption can be limited; (2) The value of a goods and services considered to have the same level of urgency; (3) Equitable distribution will occur naturally; (4) The economy will always be in equilibrium; (5) Social cost will always be counted in determining the price.[2]

The conventionalist assumed that consumptive level for every individual could be limit by themselves without any rules and regulation that needs government intervention. The actual, the consumptive level is unlimited, since human is always doing anything to fulfill their needs and also their wants.

The value (price) of goods or services is assumed as the urgency level. However, the price is consisting of many variables that could not assume as urgency level.

The wealth distribution is assumed happen naturally. While in fact, the distribution is never happen automatically without any government intervention. The huge gap between rich people and poor people is still happened.

To help the poor, social expense assumed has been included in the price of the goods and service, which in fact, that condition is never happen. The social expense needs to be realized with government support, to make it happen.

However, the conventional economic system is considered failed, Islam revealed by God as a balanced system between material needs and spiritual needs. Some Islamic economic concepts are (1) The moral-based of economic mechanism; (2) Strong economic motivation to direct each individual in providing the best, both for themselves and also for the community; (3) Economic and Social restructuring by considering resources scarcity.[3]

With the economic growing in many countries today, the economic system has high reliance on financial resources, economic transactions, and economic efficiency, which are also the efficiency in financial institutions. So that every single transaction which is carried out both by individuals and by financial institutions is essential, in order to distribute funds through intermediation from people who have the funds, to the people who lack in funds, can running well-balanced. Currently, the role of intermediation conducted by financial institutions, such as banks, insurance, stock brokers, multi-finance, capital markets, etc.

In practical, the process of every single transaction has much variation transaction forms. So that, it needs to be determined in details, which transaction is permitted according to Islam, and which transactions are prohibited by Islam.

2. SALES TRANSACTION

There are several basic motives behind the process of making profit from every business transaction is conducted, there are (1) There are some efforts to add value to in the product or service (Al-Kharaj); (2) There is a risk in doing business (Al – Ghurm); (3) and the third is the cost in selling product or service (Al-Dhaman).[4]

In its development, every transaction is within the monetary system by using money as a commodity that serves as a standard to facilitate trade value. Is is indicated as standard of wealth such as land, animals and buildings. Those developments are accompanied by the practice of lending, where rich people lend the money to individuals or other companies that could utilize their excess funds.

But in the implementation of borrowing process, there are some deviations occur, which is not complying with Islamic rules. These irregularities have occurred in many countries and have occurred since the Rasulullah saw era, which was the riba in each transaction. There is some misunderstanding of riba in various circles, where the perception that interest in banking industry is not riba because it is not excessive. Next perceptions are, interest is needed because of inflation, riba is irrelevant to commercial loans, and the final perception is riba allowed in dharurah conditions.

These assumptions are wrong because Islam revealed by God to manage all affairs in the world, including the economic field. Rules about riba were governed in some verses of the Quran, and Sunnah.

3. SHARIAH RULES

Shariah is a rule in Islam, where Islam is closely associated with the concept of Tawheed. Tawheed is a relationship between man and Allah SWT as the Creator of the universe, where humans have a commitment to Allah SWT to follow all the rules given by Allah SWT.

Islamic law (Shariah) covers all aspects of life. For clarity of understanding one has to distinguish between laws related to ibadat (worship, prayer) and laws relating to muamalat (transactions, worldly affairs). [5]

In terms of economics, Islam have several objective which covered in the Shariah that have five goals which need to be protected for the achievement of Maslahah, ie Religion, Life, Knowledge, Inheritance, and Treasure. These goals has been known as Maqasid Shariah. So in business transactions, the achievement of Maslahah can be reached by applying the Shariah.

In the Al-Quran, it found that 12 Quranic verses dealing with Riba, which occurs 8 times, 3 times in 2:275 and one time each in 2:276, 2:278, 3:130, 4:161 and 30:39. Here are quotes from Qur’anic verses that had been mentioned above

Al-Baqarah (2:275) “… And Allah has justifies the trades and forbids the Riba….”

Al-Baqarah (2:278) – “… and leave the rest of Riba (who have not collected)…”.

Ali-’Imran (3:130) – “… do not eat Riba with the multiply… ”

An-Nisaa (4:161) – “and because they eat riba, but in fact they have been banned from it, and because they eat the wealth of people with a wrong path….”

Ar-Ruum (30:39) – “… and riba (additional) that you gave to her property only grew for human’s wealth, then the riba does not give additional value for Allah. …”

From the verses mentioned above, Islam has provided rules in transactions. Which transaction is prohibited, and which one will be allowed. The explanation regarding that statement will be described in the next section.

4. PROHIBITED TRANSACTIONS

There are several things that must be observed to see which transaction is prohibited or not. There are the objects in the transaction, the way we do the transaction, and the uncomplete transaction. From the object side, some transactions became forbidden because the objects in transactions were prohibited by Shariah Rules, i.e. alcohol, pork, carrion, and blood.

The second is the prohibition transaction from the way we do the transaction, which is considered unlawful. Each human activity, including the economic field, it is strongly associated with shariah laws that should not be violated. For example are tadlis, taghrir (gharar), ikhtikar, ba’inajasy, riba, maisir, and risywah.

And the last is the prohibition of uncomplete akad in a transaction. All transactions were done by two people or more, based on the pleasure of each side, that must meet the Shariah rules. A transaction can be said to be illegal or uncomplete akad if not fulfilled the terms, there has been ta’alluq, and the last is would happen shafqatain fi al-shafqah.

In the following discussion, this paper will focus on the prohibition of transactions performed by way we do the transaction. In conventional practice, one of people do the transactions are carried the application of interest. Interest in Islamic perspective is prohibited transaction because it violates the rules of Shariah, which known as riba.

Literally, riba means “to increase, to grow, to rise, to swell”.[6] In Shariah perspective, Hanafi’s School has explained, which riba is a surplus of commodity or an excess in return without counter value. It means that riba is a predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified time period. Riba was also made forbidden in the 8th or 9th year after the Rasulullah saw Hijrah (flight from Makkah). In the Al-Quran, it found that 12 Quranic verses dealing with Riba. The word riba occurs 8 times, 3 times in 2:275 and one time each in 2:276, 2:278, 3:130, 4:161 and 30:39.

5. THE PRACTICE OF RIBA

Riba in every transactions nowadays, riba can be categorized into several types include Riba Fadl, Riba Nasiah, and Riba Jahiliyah.[7]Riba Fadl has also known as Riba Buyu’. It occurs as a result of Riba from the exchange of similar goods that do not meet several criteria. The violated criteria are the qualities of goods which are not equal (mistlan bi mistlin), the quantity of goods exchanged are not equal (sawa-an bi-sawa-in), and the last is, the time of delivery is not in the same time (Yadan bi Yadin).

Riba that we mentioned above can affect the oppression either for one of the party, both parties, and possible also for other parties. In banking, Riba Fadl is found in terms of buying and selling in a foreign exchange, which is not in cash (spot transaction).

The next category of riba is Riba Nasi’ah. Riba Nasi’ah can be referred as Riba Duyun. It happened as a result of debts that do not meet the criteria for taking profits in the transaction. These criteria consist of the profit is not taken because of the risk (al ghunmu bil ghurmi), profit is not taken because of the effort to give the additional value, and then the criteria which is not taken align with the expense (al-kharaj bi dhaman).

In practice, Riba Nasi’ah occurred because there is a difference, changes, or addition of goods delivered today with the goods delivered later. In every business activity, there is always a possibility of gains and losses. So that might be happened and it is also not certain (uncertain). But in this Riba Nasi’ah, everything is always considered to be certain. These exchanges can cause oppression for one party, both parties, as well as other parties.

For the case of conventional banking, Riba Nasi’ah is found in many credit interest payments and interest payments from deposits, savings, current accounts, and others. The conventionalist’s opinion on the application of interest is that applies the principle of time value of money, which is defined where “A dollar today is worth more than a dollar in the future because a dollar today can be Invested to get a return” (Aswath, 2001).[8]

The argument is not accurate, because in every investment there is always the possibility to get return (positive return), loss (negative return), or zero (no return and no loss). Thus in conventional economic theory, uncertainty returns converted into a certainty returns. Almost no strong reason for the assumption that the prohibition is only applies to debt for the consumptive purpose, and not for business loans.

And the last is Riba Jahiliyah, which Riba came as repayment activities carried out by providing a greater return than the principal loan. The returns greater than the principal because the borrower is not able to return the loan at the agreed date (Usmani, Muhammad Taqi. 2001)[9]

The violation from the Shariah rules has occurred in the case of Riba Jahiliyah, where the loan is a transaction on the basis of goodness (tabarru ‘), while asking for compensation or reward is a business transaction (tijarah). It means that, there was happened that the goodness transaction intended to be a transaction for business purpose. In the conventional banking example, Riba Jahiliyah is found in many loan transactions such as credit cards, loans without collateral, interest payment savings, deposits, etc.

Not only banks, but also in the modern financial system, it has now occurred business activities that do not have a positive impact on the real sector. What happened was the collection of money by the banks to open savings services, and take advantage from the loan disbursed.

When a bank provides business loans, the bank did not provide financial advice to the borrower to increase profits. What happens is where the borrower must pay the loan on time, regardless of ability to make payments to the borrower.

The main thing from the application of the riba from the economic side is the exploitation of social and economic. This has violated the core of Islamic teachings in terms of social justice.

6. SHARIAH COMPLIANCE SALES

It has been mentioned in Qur’an in the verse of Al-Baqarah (2:275) that “Allah has permitted trade and forbidden Riba”. In business transactions, buying and selling is allowed since there is not any oppressed party. Sharing of risks and uncertainties is an important characteristic of Islamic Contract.

Shariah emphasized the distribution of gains and losses fairly. So that an uncertainty is not only for one party, but also all parties have the uncertainties. From these uncertainties, the contract/aqad of the transaction can be categorized into two major groups, namely Natural certainty Contracts and Natural Uncertainty Contracts.[10]

Natural Certainty Contract is a form of contract or business co-operation which provides certainty in the payment, both in terms of quantity and also the payment time. In this transaction, there is an agreement about certainty in the beginning of the transaction between both parties. Some certainty criterias are the certainty in terms of the object exchange, the amount, quality, price and delivery time. As an example of these transactions, there are transactions about trade, pay-paid, and lease transaction. From these types of contracts, business transactions are conducted, do not have the capital to build business ventures to share profits and risks.

From the object side of the exchanged, there are two general types of exchange. The first is the exchange with goods and services as the object (‘Ayn), which is a real asset. And the second is the exchange of money and securities, which are financial assets (Dayn).

From those two types, there will be able to be identified for several types of exchange. The first is the exchange of real assets (‘Ayn) with real assets (‘Ayn), and the exchange of real assets (‘Ayn) with financial assets (Dayn), and the last is the exchange of financial assets (Dayn) with financial assets (Dayn).

In the exchange of real assets (‘Ayn) with real assets (‘Ayn), if the types of asset are different, the transaction would be allowed. But if it is in the same type, it should consider the quality of the assets exchanged. If the quality of visible asset can be distinguished, then this transaction according to the rules of shariah is allowed.

For the cases where tangible assets are indistinguishable in the terms of the quality, it must meet several criteria which the asset have same amount, and the time of the exchange, is performed simultaneously.

For transactions that conduct the exchange in real assets (‘Ayn) with financial assets (Dayn), it needs to be identified by the asset type. When the real assets (‘Ayn) is a goods, then the exchange of real assets (‘Ayn) with financial assets (Dayn) called as a trade (Al-Bai‘). Meanwhile, if the eschange asset (‘Ayn) is in the form of services, then this type of transaction can be said as the rental transaction or wage-paid (Al-Ijarah).

Payment method that became a medium of exchange in the form of financial assets (Dayn) can be categorized into several types of trading which comly with Shariah rules. These types of payment include cash (now for now), Bai’Naqdan or deferred payment (Bai ‘Muajjal), delivery of goods or services are deferred (Bai’Salam)

Bai’Muajjal category consists of two types of deffered payment. The first is a payment made in full payment (Muajjal), and the second is how to make a payment through installments (Taqsith).

While the category of deffered goods or services delivery (Bai’Salam), it is consists of two types. The first was carried out full payment at the beginning (Bai’Salam), and the second is a payment made through installments, but the payments must be paid before the goods are full delivered (Bai ‘Istishna).

In the form of contract where assets (‘Ayn) is a service (Al-Ijarah), can be categorized based on the benefits gained. Ijarah to get the benefit from goods is called lease, and Ijarah to get the benefit from the service is called the wage-paid.

From the category of wage-paid, Ijarah can be subdivided into two categories, based on the performance of the services. For the performance that reflected to the payment directly is called Ju’alah or success fee. However, for the performance that does not reflect the payments is called salary or rental.

In the exchange between financial assets (Dayn) and financial assets (Dayn), it can distinguish between the Dayn in money with Dayn not in money (bonds). For Dayn in money, the exchange is allowed to meet the criteria where the exchanged is done for the same amount (Sawa-an bi Sawa in), and exchanges made at the same time (Yadan bi Yadin). In Dayn in securities must meet the condition, where the payment of debt must be certain (Mustaqir).

Back to the main group of contracts, Natural Uncertainty Contracts is a mixing theory based on the mixing object and the time of the mixing activities. Where the real asset (‘Ayn) is in goods and services, and financial assets (Dayn) is the form of money or securities, as the difference in natural uncertainty contracts.

In the terms of time, mixing theory distinguishes between the period of delivery, which is done at the time of the aqad, and the delivery time is done in the future. From the grouping based on the object and the mixing time, there are three types of mixing that can be identified. First is the mixing of real assets (‘Ayn) with real assets (‘Ayn), and then mixing of real assets (‘Ayn) with financial assets (Dayn), and the last is the mixing of financial assets (Dayn) with financial assets (Dayn).

In mixing between real assets (‘Ayn) with real assets (‘Ayn), mixing occurs between the two parties to mix the owned product or service in order to create a single product or service that can be used as a source of income. It is usually called Shirkah ‘Abdan.

Next is the mixing of real assets (‘Ayn) with money (Dayn), which is divided into two kinds of contracts, namely Shirkah Mudaraba and Shirkah Wujuh. Shirkah Mudaraba is mixing the money with the services expertise, where the money invested by the owners of capital and services expertise by the party who will run the business. While Shirkah Wujuh is a contract where the owners of capital invest in money (Dayn) and others contributed the good name or reputation.

For the mixing of money (Dayn) with money (Dayn), it can be grouped based on the amount of funds. If the amount is provided by two sides equally, then the aqad is called the Shirkah Mufawadhah. If the money by two parties is not equally, then the aqad is called the Shirkah ‘Inan.

In terms of payment methods, the mixture of money (Dayn) with money (Dayn) in accordance with Shariah rules, if the transfer was made during aqad. For the delayed delivery of the money would violate the rules of Shariah.

7. COMPARISON

With the availability of Shariah rules, businesses transactions are not allowed if the transaction contains the prohibited content, such as riba, while trade is allowed in Islam as mentioned in Al-Quran verse Al-Baqarah (2:275). The detail explanation on the previous section about Riba and Shariah compliance Sales, then we can compare between them, which will be described in the following table:

Interest (Ar-Riba)

Profit Margin from Trade (Ar-Ribh)

Platform: Positive Law

Platform: Shariah Law

Source: Capitalism Ideology

Source: Al-Quran, Sunnah & Ijtihad Ulama

Money as a commodity. Bank lend the money

Goods as an object. Bank use goods as a commodity

Relationships: Debtor-Creditor

Relationship: Partnership

Interest may be changed unilaterally

The agreed price cannot be changed

Not associated with the real sector (Monetary Real Sector is separately)

Monetary and Real Sector related strong, so encourage the acceleration of the flow of goods, production and employment.

If non performing loan was getting higher, then the interest will be a compound interest

Margins and selling prices unchanged

No trade transaction

Fulfill buying and selling principles

Determining the interest is not considering the profit and loss

Determination of the profit sharing ratio in aqad, based on the profit and loss

The percentage of interest previously determined, based on the lending amount

The profit sharing is accordance with the agreed ratio

Interest payment amount is not increased

align with the increment of profits

The number of profit-sharing increases align with the increment of the income

If loss heppened, it is only covered by the Borrowers, based on fixed interest payment as promised in the agreement

We can explain the above table. The first is the platform side, which the transaction could comply with the Shariah if the platform of the transaction is coming from Shariah Law, which Al-Quran, As-Sunnah, and also Ijma threated as the sources.

In business activities, transaction between two parties could have the relationship types. In interest based transaction, the relationship between both parties is called as debtor-creditor. While the deptor is the party who borrow the modey for rich people who lend the money, and expect get the return as an interest, which is not comply with Shariah rules.

However, the relationship between both parties in transaction which comply with Shariah is called partnership. There are several types of partnership that has been described in the previous section. There are Shirkah Mudaraba, Shirkah Wujuh, Shirkah Mufawadhah, and Shirkah ‘Inan as the sample aqad which comply with Shariah rules.

Since interest based transaction is using money as a commodity, the real business sector would not be reflected in the interest rate that used as a benchmark in determining the profit margin. While in Shariah transaction, goods and services used as a commodity that can implies the positive return. Money is used as a tool of exchange. Therefore, monetary and real sector related very strong, that can encourage the acceleration the flow of goods, production and employment.

In Shariah transactions, the margin and the selling price would not be changed as the agreed in the aqad. Whereas in interest based transaction, interest could be a compound interest when the borrower could not pay the installment timely. It means that higher non performing loan; the amount of interest could be higher.

In the interest based transaction, the determination of the interest rate is not reflecting the profit and loss rate. Lender tends not to care the ability of the borrower. Nevertheless in Shariah transaction, profit sharing was determined based on the profit and loss.

Shariah transaction has to fulfill buying and selling (trade) principle in every single transaction. Contrary with interest based transaction; there is no need to do trade transaction money has been used as a commodity.

In uncertainty contracts, there are three posibilities that could happen. While the loss happened, the loss must be covered by the borrowers, based on fixed interest payment as promised in the agreement. And the lender still received the principal with additional margin which called as interest. Different with Shariah contracts, if loss happened, both parties will cover the loss.

8. CONCLUSION

In the business activities within an economic system nowadays, there are have many violations occur in which each transaction contains riba, which is called the interest. Islam has been revealed by God, with one of the purpose is to regulate economic affairs. The prohibition of riba has been explained in Al-Quran surah Al-Baqarah (2:275).

There are many assumptions which the interest is perceived allowed in some cases. But in Shariah rules, the usage of interest in the transaction is not allowed. There are several things that must be observed to know which transaction is prohibited, and which transaction is allowed. There are the objects of the transaction, the way we do the transaction, and the completeness of the aqad in the transaction.

Riba is part of the prohibited transaction in the terms of the way we do the transaction. In practice of Riba, it can be categorized into several types include Riba Fadl, Riba Nasiah, and Riba Jahiliyah. Riba could affect the oppressed for one of the party, both parties, as well as another parties which could get the impact from the implementation of riba. There is no strong reason to assumed that the prohibition is only applies for the debt in consumptive purpose and not for commercial loan.

Therefore, there several aqads in the business transaction, which are allowed and do not violate the Shariah rules. Those types of transactions can be categorized into two major groups. There are Natural Certainty Contracts and Natural Uncertainty Contracts. Those two major groups is described by aqad with exchange theory, and also aqad with mixing theory.

We can compare the transactions between transaction which comply with Shariah rules and transaction with interest based, in the aspect of law, transaction process, and also the impact after the implementation. We can see that the implementation of Shariah in every transaction, economic stability can be achieved accordance with the Maqasid Shariah, where protect the Religion, Life, Knowledge, Inheritance, and Treasure.

Finally, we can conclude that with the elimination of riba from economic system, not only affected the positive impact in the economic side, but also social justice, and economic condition with good moral and ethical environment.

World financial crisis that happened many times, have been affected to the world. The recession was happening in many countries. The impact was not only to the country level, but also indidual level.

Therefore, with the purpose of financial stability in retirement, retirement planning, as part of wealth planning management is one of the best methods that individual can do to minimize risk from financial crises impact. Therefore, risk in individual level could be decreased.

One of the good impacts is the changes of purchasing power, which will be decreased. It means that the individual’s lifestyle is almost unchanged. For example eating frequently and nutrient-rich foods can be fulfilled.

At the end, the economic condition globally can avoid the recession. It is because of the stability in the macro and micro economic aspects.

1.0 Introduction

World financial crisis were associated with banking panics or recession that happened in many countries in the 19th and early 20th centuries.[1] Other situations in more specific conditions of financial crisis are stock market crashes, the bursting of financial bubbles, currency crisis, and sovereign defaults.

Banking panic is called systemic banking crisis. That situation was happened while bank were reluctant to lend because they worry that they have insufficient funds available, and it was widespread.

The bursting of financial bubbles is a crisis that happened while financial asset’s price exceeds the present value of future income. If there is a bubble, there is also a risk of a crash in asset prices. It happened while the market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall.

Currency crisis is a balance of payments crisis, which happened because of a speculative attack that forced the country to maintain a fixed exchange rate by devaluating its currency.

The last is recession, it is a negative GDP growth in the last two or more quarters. Sometimes, it is called economic stagnation, or depression, while happened in a long period of slow growth.

Many recessions have been caused by financial crisis. For example is the Great Depression, which was preceded in many countries by bank runs and stock market crashes. The sub prime mortgage crisis and the bursting of other real estate bubbles around the world were widely expected to lead to recession in the U.S. and a number of other countries in 2008.

2.0 Causes of financial crisis

In financial market, there is a strategic complementarily condition which affected to the financial crisis. In many cases, investors have incentives to coordinate their choices. For example, someone who thinks other investors want to buy many Japanese yen may expect the yen to rise in value, and therefore has an incentive to buy yen too.

If the investors who think like that much bigger, then there are less yen that had been bought, until there is no value for yen. Therefore, financial crises are sometimes viewed as a vicious circle in which investors avoid some institution or asset because they expect others to do so.

Another cause of financial crisis is leverage, which means borrowing to finance investments. It borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore, leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy. Bankruptcy means that a firm fails to honor all its promised payments to other firms.

Another factor that believed to contribute in financial crises is asset-liability mismatch. That condition is a situation in which the risks associated with an institution’s debts and assets, which are not aligned appropriate.

The mismatch between the banks’ short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to withdraw their funds quickly than the bank can get back the proceeds of its loans. The sample case is financing long-term investments in mortgage securities.

Many analyses of financial crises emphasize the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. It has ever been happened in dot com crisis.

Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. Goal of regulation is transparency: making institutions’ financial situations publicly known, and to make sure that institutions have sufficient assets to meet their contractual obligations, through reserve requirements, capital requirements, and other limits on leverage. Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat.

Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled the resulting income.

Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of the 2008 sub prime mortgage crisis.

Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.

Economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

Some financial crises are believed to have played a role in decreasing growth that could have a recessionary effect on the rest of the economy. Those crises could be caused by currency crises and banking crises together, which can cause recessions.

In Islamic perspective, financial crises are caused by basic concept of conventional financial system, which is in the single transaction of conventional transaction. There are four factors that made transaction prohibited. The first is a prohibition in the substance (zat), such as khamr, alcohol, pork, carcass, and blood. Second is prohibition of riba, which appear if uncertain contracts converted to be certain contracts. Third is avoidance of gharar, which appear if certain contracts converted to be uncertain contracts. Usually it happens in exchange transaction. And the last is prohibition of gambling (maisir), usually it happens in zero sum game.[2]

3.0 Effect of financial crisis

3.1 Effect to the world

All type of crises mainly affected to the economic recessions. Especially for the respective countries who are experiencing the recession. The impact is different for each country. It is depend on the country’s economic condition, which impacted not only to the poor countries, but also to the developing countries, and the developed countries.

Example case of global crisis in the last 2008, could impacted more than 90 million people could be living in poverty by 2010. The impacted to the developing countries are:[3]

People are adapting livelihoods in order to cope but often into illegal or dangerous activities.

People are eating less frequently, less diverse and less nutrient-rich foods.

There are signs of rising domestic violence, tensions between groups, crime and drug and alcohol abuse.

Different countries are putting the blame for the crisis in very different places.

Recession in rich countries will hurt developing countries’ exports but it is also lowering the price of oil, reducing the severity of the impact on oil importing nations.

Access to trade credit is not a major problem for established garment and horticultural firms in Africa. It is however a serious problem for some Latin American firms.

Major global buyers are forcing developing country suppliers to absorb the bulk of the risks associated with the crisis.

China’s state enterprises are using the crisis as an opportunity to consolidate investments in Africa, particularly in the energy sector.

After ripple effects of a sub prime mortgage lending crisis in the U.S. began to be felt across the globe, housing values deflated, banks failed, credit froze, and layoffs spurred unemployment levels not seen in decades. While all of the accumulated evidence points to a deep global recession now, the recent downturn unfortunately has had a disproportionate impact on people aged 50+.[4]

3.2 Effect to individual

The above explanations are focusing in macroeconomic aspects, which is specific on the country level. We can consider that individual level is the last level who feels the financial crises effect. However, individual has the important decision in facing the financial crises and recession.

For the individual, the main problem is the changes of the purchasing power, which reflect to the changes of the lifestyle. In some countries, some people are eating less frequently, less diverse and less nutrient-rich foods.

Purchasing power could be caused not only by the rise of the daily need’s price, but also the decrement of the individual source of funds. Both are affected by financial crises, which make individual’s lifestyle changed to the unexpected condition.

In US, over the last 12 months, retirement accounts have lost $2 to $3 trillion in value. Between the 2nd quarters of 2007 and 2008, private pension fund assets declined by over half a billion dollars while state and local pension funds declined at rate of nearly $350 billion. In the current labor market, those aged 55 and over are losing their jobs at a higher rate than the young are.

Policymakers must determine whether the right vehicles for retirement savings are in place, what is required to rebuild consumer confidence to begin reinvesting in the market and our own futures, and how to encourage older people to stay in the workforce longer in an environment of high unemployment.

4.0 How to Protect Income

Financial crises is the worst caused for individual’s lifestyle. So that we as an individual, need to protect our income in order to stabilize our financial condition. Especially how to protect our income for retirement plan in global crises, is another thing that need to be discussed.

There are many approach methods in investment plan as a solution to protect our income. Which investment is one of the solutions that would be highlighted in this discussion? There are three types of period terms in investment plan. There are short terms, medium terms, and long terms.

4.1 Short Terms Investment

Short-term investments can be considered, if you need to make money quickly. Short-term investments allow you to invest an amount of money at a high yield rate of return, and gain access to the return sooner rather than later.

You might need short-term investments if you have a pressing need coming up in the near future. For example, if you might need a down payment for a house or car in a year or two, you could use short-term investment options. The period is usually between one up to ten years. This is most likely different with retirement investing. Some even choose to use short-term investment funds to supplement their retirement income.

Most people are comfortable with investing around ten percent of their total income. Then, choose the investment to use. It is best to take the amount and invest it into one particular investment. There are several short-term investment options out there, and the key to making money successfully is finding the best short-term investments.

The sample investments for short-term periods are stocks, securities, savings, deposits, and bonds. All of them have same characteristics. There are liquid in short time. Stock is the investment in stock exchange, which investors can buy and sell stock of any company. The characteristics are liquid, high risk, but it is high return. However, the investor must have knowledge of the market trends, company portfolio, and needs a lot of time to monitor any information that could be the key driver of the stock price’s movement.

Securities are similar with stock investment. The differences are in the process and the institution involved which affected to the investor. Securities consist of several stocks, which are combined in a portfolio. The portfolio is managed, monitored, and analyzed by fund manager. The benefits for investors are simple investment, low risk, does not need to have a complex knowledge, and it savings much time in monitoring activities. However, the return is not as high as stock investment.

In addition, the other samples are savings, deposits, and bonds. Where all of them are more liquid than the first two samples. These investments are the least risk and the least return. These are simple investments for anyone, who has money.

4.2 Long term Investment

The long-term investments account differs largely from the short-term investments account in that the short-term investments most likely will be sold, whereas the long-term investments may never be sold, which long-term investments are where diversification is helpful.

The sample investments for long-term periods are insurance, real estate, and equity. Insurance simply means joint guarantee. It is not a contract but an agreement for mutual help among the group, and can be visualized as a pact among clients who agree to jointly guarantee among themselves against loss or damage that may befall any of them. The basic objective is to pay for defined loss from a defined fund.[5]

The objective of the insurance is to protect the loss. In addition, for the modern insurance nowadays, the objective of the insurance is not only for protection, but also for investment. Insurance is combined with portfolio investment, which managed by fund manager. So insurance is categorized as low risk with low return investment. However, the return could be received in a long time. The benefits are less effort to have knowledge and savings time for monitoring.

Next investment is equity. Equity in this discussion means investment in direct investment in real business. Investors, who have money, give the money to the party who will run the business. Investment in equity is categorized as high risk and high return. Investor must have much knowledge about the business industry’s characteristics.

Most of investment in equity, investor will have a return in long period since in the early, management must build and setting the business up. This process needs much effort from investor to have a good analysis and invest more time.

The last is the investment in real estate. Real estate consists of three types. There are personal residence, income property, and speculative property. In the individual level, investment in real estate will make income for investors who have the property from the rental fee.

This investment is categorized as the long-term period investment, which potentially high return and potentially high risk if it were wrong managed. The operational cost in real estate is relatively higher than another investment and the operational process is wasting much time. In this traditional real estate, investor must have much money in the early to buy the property and operational cost.

Same with several stocks that combined in securities, real estate also could be managed by real estate investment trust to be sold to investor. This investment is simpler than traditional real estate. Investor does not need to invest time to maintain the property, and it is relatively liquid. The benefit for investor is less money to invest in the early, less of operational cost, and savings time.

The choice of investment has been determined in the above sections, both for short-term and long-term period. Moreover, how do we combine those investments as the optimum income, both for short term and long term as our retirement plan?

There are some combinations which could be combined depends on the investor’s preferences in facing the retirement. Retirement planning is a comprehensive analysis of the tax-effective strategies, which are available to assist you in achieving your goals for retirement; which the process includes a comprehensive review and analysis of your assets, liabilities, saving patterns and investment strategy in the context of your timing of your retirement, retirement income and your tolerance for investment risk.[6]

It means that retirement planning is a plan to ensure that we have enough money to spend when we will retire. It includes the amount to save and to invest in the diversified portfolio. It should also consider the future inflation rate, the life style expected etc. Retirement planning is one of the financial planning which focusing on wealth protection.

We must plan our retirement through several processes. First is setting of Retirement Plan Goals. The Second is analyzing information and calculating savings needed to meet the Objectives. Next is planning the distribution, ascertaining the best method to distribute that is best. Then, it is implementing the plan. The last is review the plan.[7]

However, the investment structure for the retirement plan must be considered for investor. In Islamic perspective, all each transaction must bee free from riba. Risk in retirement plan must be managed properly as mentioned in Surah Yusuf (12:67) and Surah Yusuf (12:47); (7 yrs good harvest,7 yrs for bad harvest).

Those risk factors that must be managed consist of four types. There are personal risks, property risks, liability risks, and investment risks. In order to keep economic stability in retirement, we could apply the portfolio theory. Diversification and tax management are the main point in managing portfolio investment, which mentioned in the section 4.1 and 4.2.

The portfolio preferences could be created by considering the types of returns (capital appreciation/long term/rental income), level of returns, and leveraging tool for using borrowed funds. However, there are several portfolio investments that must be managed properly, such as market risk (macro economic issues), specific risk (related with industry), and financing risk (cash flow). All of the retirement plan methods can contribute to minimize risk of the wealth planning management.

5.0 Conclusion

Therefore, with the purpose of financial stability in retirement, retirement planning, as part of wealth planning management is one of the best methods that individual can do to minimize risk from financial crises impact. Therefore, risk in individual level could be decreased.

One of the good impacts is the changes of purchasing power, which will be decreased. It means that the individual’s lifestyle is almost unchanged. For example eating frequently and nutrient-rich foods can be fulfilled.

At the end, the economic condition globally can avoid the recession. It is because of the stability in the macro and micro economic aspects.